EBA Stress Test 2016

EBA Stress Test 2016

The draft methodology of the European Banking Authority (EBA) 2016 stress test was released last month. Clients should be able to identify the largest challenges they face from the proposed methodology even before it is finalised at the end of February 2016.

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The scope of institutions that were selected was significantly reduced to 53, covering 70% of the total banking sector in the EEA.

In line with the previous exercise, two scenarios, baseline and adverse, have to be applied and will be conducted by banks following a bottom-up and static balance sheet approach. The duration of the exercise will cover three years (2016 – 2018), based on end-2015 data. New regulations and accounting changes need only be considered if legally binding and endorsed at year end 2015, so IFRS 9 and Basel 4 changes are out of scope.

One innovation is that the 2016 exercise will not be a pass-fail exercise. No capital threshold will be defined. However, the results will be an important input for the 2016 supervisory review and evaluation process (SREP). Large stress scenario impacts on CET1 capital beyond the 2.5% capital conservation buffer will likely lead to an increase in the 2016 Pillar 2 capital add-on.

The new methodology also contains elements that might be considered overly conservative or too simplifying. This has resulted in active participation in the consultation process: the EBA received more than 1,000 questions and comments from banks. However, a more severe stress impact through increased conservatism in the methodology is likely to remain.

Clients should be able to identify the largest challenges they face from the proposed methodology even before it is finalised at the end of February 2016. Banks should be prioritising their ability to run stress tests under the proposed methodology and analysing the quantitative impact of methodology changes to the portfolio in order to derive early on a rough estimate of stress test outcome. These impact studies should also be used for senior management preparation and capital planning.

The intensive phase of the stress test exercise will be between end-February 2016 (publication of final methodology, templates and scenarios) and May/June 2016 (submission of final results to the EBA). This will coincide with the core phase of the 2016 SREP (for banks supervised by the ECB) and major transition projects (such as IFRS 9, BCBS 239 and Anacredit). Early resource planning will be a key priority for the teams involved up to the management board.